EDHEC: Is it a good time to invest in private equity?

November 26, 2024

By Abhishek Gupta, Associate Director, and Srinivasan Selvam, Senior Researcher in Finance - Solutions, both at EDHEC Infrastructure & Private Assets Research Institute

Private equity valuations are under scrutiny as investors cope with macro-uncertainty, increasing regulatory pressure for accuracy and transparency, and limited partners’ growing need for liquidity.

Using privateMetrics data, which covers more than 1 million companies globally across 150 countries, we recently produced a report that provides a detailed analysis of valuation metrics – including EV/Sales, Price/Book, and EBITDA multiples – the latest valuation trends, strategic opportunities for investors, and a deep-dive into the valuation drivers in the private equity market. Using the PECCS® classification system, this analysis offers a granular look at various industries, allowing for more accurate peer comparisons.

Key Insights

Valuation Trends Across Industries

privateMetrics reveals significant variation in valuation trends across different sectors. While most industries have seen their valuation multiples expand or remain stable in the past year, the Hospitality & Entertainment sector stands out with a notable contraction in profit multiples. This divergence highlights the importance of industry-specific analysis when evaluating private equity investments.

Top-Valued Industries

Based on a comparative analysis of median multiples derived from sales, book value, and EBITDA, the Information & Communication and Health industries emerge as the most highly valued. Notably, their (unadjusted) EBITDA multiples stand at 20.24x and 24.12x, respectively. In contrast, industries such as Retail, with an EBITDA multiple of 14.43x, exhibit lower valuations across all three metrics.

Dispersion and Risk

The data emphasises that the range of multiples within each industry segment – a measure of dispersion – offers insights into the risk profile of the sector. For instance, the Retail sector demonstrates the widest range of EBITDA multiples, spanning almost 18x, suggesting a higher degree of risk compared to other sectors, notably subscription-based businesses and those with a strong B2B focus, which tend to command higher valuations and potentially exhibit lower risk.

The Health Industry: A Closer Look

The Health industry claims the title of the most expensive sector based on its current valuation, with a median unadjusted profit multiple of 24.12x. Despite a modest increase in valuation over the past year, this sector has experienced above-average sales and profitability growth. However, the size of companies and profit levels remain low relative to other sectors, indicating potential for further profit expansion. Importantly, the Health industry exhibits lower valuation dispersion compared to other sectors, which may translate into broader strategic opportunities for investors seeking to acquire assets.

Information & Communication - Opportunities Amidst Risks

The Information & Communication sector boasts high valuations, with a median sales multiple of 2.19x and an EBITDA multiple of 20.24x. However, this sector has not witnessed robust sales or profit growth. The prevailing high-interest-rate environment further dampens prospects for future growth, and the observed front-running of valuations without corresponding improvements in fundamentals may signal potential downside risks. Nevertheless, the wide dispersion of valuations within this industry suggests that attractive investment opportunities could exist for discerning investors.